On February 8, 2024, the U.S. Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) published a notice of proposed rulemaking (2024 NPRM) about Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations concerning persons involved in residential real estate closings and settlements. To promote U.S. AML/CFT objectives, the NPRM proposes a system of streamlined Suspicious Activity Reports (SARs) for certain U.S. real estate transactions. The NPRM does yet not have the force and effect of law, and FinCEN has requested public comments to be submitted until on or about April 16, 2024. A brief summary of the background and substantive provisions for the NPRM follows.

Background

The Currency and Foreign Transactions Reporting Act, generally referred to as the Bank Secrecy Act (BSA), is designed to combat money laundering, the financing of terrorism, and other illicit financial activity, e.g., proliferation of weapons of mass destruction, narcotics trafficking, and transnational criminal organizations, consistent with international standards published by the Financial Action Task Force (FATF).

Under the USA PATRIOT Act of 2001, as amended, persons involved in real estate closings and settlements are included within the statutory definition of a U.S. financial institution, such as banks. However, since 2002, FinCEN has generally exempted most such persons from being required to establish AML/CFT programs or file SARs, other than: (1) non-bank residential mortgage lenders and originators as a type of loan and finance company and (2) housing-related Government Sponsored Enterprises, covered in 31 CFR parts 1029 and 1030, respectively.

Beginning in 2016, FinCEN started publishing Geographic Targeting Orders (GTOs), modified over time, requiring U.S. title insurance companies to file reports and maintain records about non-financed (i.e., all cash) purchases of residential real estate above a certain price amount by certain legal entities in select metropolitan areas of the United States, such as in the states of New York, California, Florida, or Texas.

Also, in 2021, FinCEN published an advance notice of proposed rulemaking (2021 ANPRM) seeking public comments regarding potential AML/CFT regulations for certain real estate professionals.

Based on information collected by the GTOs, as well as public comments in response to the 2021 ANPRM, FinCEN has formulated the proposed regulatory approach in the 2024 NPRM.  Notably, although the 2024 NPRM has some correlation to requirements imposed by the Corporate Transparency Act for certain US entities and implemented through the Beneficial Ownership Information Reporting Requirements Rule (BOI Reporting Rule), for which Steptoe has published separate alerts, the 2024 NPRM would serve separate AML/CFT purposes under the BSA and FinCEN’s regulations, as summarized below.

Summary of Streamlined SAR Requirement

The 2024 NPRM proposes to establish a “streamlined” SAR requirement for certain U.S. residential real estate transactions, referred to as a “Real Estate Report,” subject to certain exemptions (including those modeled after the Corporate Transparency Act (CTA), with certain additional exclusions relevant to real estate).  Information in the Real Estate Report should generally be considered confidential and proprietary, but could be shared within the U.S. Government, and potentially with foreign government authorities in connection with money laundering, terrorist financing, and other illicit activity investigations, as authorized by law. 

One notable difference with most AML/CFT regulations is that reporting persons would be able to inform transaction parties about the Real Estate Report and this would not be a legal violation (known generally as the “no tipping off” rule for a SAR).  However, it does not appear that civil liability protections for U.S. financial institutions in connection with submitting a SAR under 31 U.S.C. § 5381(g)(3) would extend to reporting persons submitting a Real Estate Report.  Although such persons would not be legally required to establish an AML/CFT compliance program or otherwise register with FinCEN, they will be obligated to implement procedures to promote compliance with the rule and maintain records, as applicable. 

In this regard, the persons subject to these reporting and recordkeeping requirements would be determined through a “cascading” approach based on the function performed by the person in the real estate closing and settlement.  FinCEN intends that such “cascade” will minimize compliance burdens on persons involved in real estate closings and settlements, and also will permit real estate professionals (as an option) to designate a reporting person from among those in the cascade by written agreement.

The Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer.  The reporting person would be required to file the Real Estate Report no later than 30 days after the date of closing.

Residential Real Property in Reportable Transfers

The Real Estate Report would apply to real estate in the United States, i.e., in any State, the District of Columbia, the “Indian lands” (a defined term in the Indian Gaming Regulatory Act), or territory or possession of the United States, in one of three ways: (1) it is real property that includes a structure designed principally for occupancy by one to four families; (2) it is land that is vacant or unimproved, and that is zoned, or for which a permit has been issued, for occupancy by one to four families; or (3) it is a share in a cooperative housing corporation.

A person may hold an ownership interest in residential real property if the person has rights to the property that are demonstrated through a deed or, for an interest in a cooperative housing corporation, through stock, shares, membership, a certificate, or other contractual agreement evidencing ownership.

Transferees in Reportable Transfers

The 2024 NPRM would require a Real Estate Report only if a transferee of an ownership interest in residential real property is a (1) “transferee entity” (i.e., any person other than a transferee trust or any individual, natural person, such as a corporation, partnership, estate, association, or limited liability company) or  (2) “transferee trust,” as defined.

The definition of a transferee entity contains exceptions for certain entities as follows:

  • regulated entities, meaning most entities exempted under the CTA, including those that are U.S. governmental authorities, securities reporting issuers, and certain banks, credit unions, depository institution holding companies, money service businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Exchange Act registered entities, insurance companies, state-licensed insurance producers, Commodity Exchange Act registered entities, public utilities, financial market utilities, and registered investment companies, as well as any legal entity whose ownership interests are controlled or wholly owned, directly or indirectly, by any of the above;
  • nonprofit organizations;
  • unregistered pooled investment vehicles; or
  • large operating companies.

The definition of transferee trust would cover:

 “any legal arrangement created when a person (generally known as a settlor or grantor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose, as well as any legal arrangement similar in structure or function to the above, whether formed under the laws of the United States or a foreign jurisdiction.”

Such definition would apply regardless of whether residential real property is titled in the name of the trust itself or in the name of the trustee in their capacity as the trustee of the trust.

However, the 2024 NPRM would exclude certain trusts that are:

  • securities reporting issuers with the Securities Exchange Commission;
  • have a trustee that is a securities reporting issuer; or
  • statutory trusts.

The Real Estate Report would collect information about the beneficial owners of transferee entities and/or transferee trusts, consistent with the CTA, except that the 2024 NPRM: (1) would apply solely to covered real estate transfers and (2) would not require reporting persons to report changes to beneficial ownership of a transferee entity or transferee trust on an ongoing basis.

Reportable Transfers

Transfers between individuals would not be reportable.  The 2024 NPRM would cover as reportable a transfer of any ownership interest in residential real property to a transferee entity or transferee trust, with the key exceptions discussed below:

  • certain financed credit to the transferee, but only if secured by the transferred residential real property and such credit is extended by a US financial institution that has an obligation to: (1) maintain an AML program and (2) file SARs; or
  • certain low risk transfers including the result of:  (1) a grant, transfer, or revocation of an easement; (2) of the death of an owner of the residential real property; (3) divorce or dissolution of marriage; or (4) transfers to a bankruptcy estate.

However, the 2024 NPRM would propose that if these exceptions do not apply, then reporting is required regardless of U.S. dollar amount, such as for sales and non-sales, including gifts and other transfers (e.g., to trusts). 

Reporting Persons

The reporting person would be identified by either: (1) the cascading reporting order or (2) by written agreement.

Cascade: This would be a sequential ranked order to determine who is the real estate professional (i.e., persons engaged as a business in the provision of real estate closing and settlement services within the US) highest in the chain to submit the Real Estate Report and keep records, as follows:

  1. real estate professionals providing certain settlement services in the settlement process; and then the person that:
  2. underwrites an owner’s title insurance policy for the transferee; then
  3. disburses the greatest amount of funds in connection with the reportable transfer; then
  4. prepares an evaluation of the title status; then
  5. who prepares the deed.

The reporting cascade is designed to capture both sales of residential real estate and non-sale transfers of residential real estate at different transfer stages that may occur from the transferee itself or through a representative, such as a real estate agent or registered agent, or it

may come directly from the transferee itself, e.g., offer and acceptance of a contract, settlement/closing, preparing or filing of the deed, provision of title insurance or title evaluation, etc.

Notably, the 2024 NPRM states that this concept of an intermediary may apply to attorneys, even though this could create an ethical dilemma for an attorney to file a SAR about a client.  FinCEN addresses this briefly, stating that this “would require reporting by attorneys only when they perform certain functions—functions that generally may be performed by non-attorneys.”

Agreement: The real estate professionals described in the cascade may enter into a written agreement to designate another person in the cascade as the reporting person.  Such agreement must be dated, identify the property, and include the name and address of the: (1) transferor, (2) transferee entity or transferee, and (3) designated reporting person, and (4) all other parties to the agreement, a copy of which must be retained by all such parties for a period of five years.  An employer, principal, or partnership may be deemed to be the reporting person on behalf of an individual employee, agent, or partner acting within the scope of such individual’s responsibility.

Information to be Reported

If applicable, persons would be required to furnish certain information regarding reportable transfers, including:

  1. name and address of principal place of business for reporting persons, transferee entities and transferee trusts, and transferors that are entities;
  2. citizenship for all beneficial owners of a transferee entity or transferee trust;
  3. unique identifying number for each person, whether any individual or entity, such as US Internal Revenue Service Taxpayer Identification Numbers, Social Security Numbers, Employer Identification Numbers, or, if inapplicable, a foreign equivalent, passport number, or entity registration number, including for individuals signing documents on behalf of the transferee entity or trust during the residential real estate transfer.
  4. description and role or responsibility of representative capacity of signing individual;
  5. information concerning payments, including total consideration by all transferees, the total amount paid, the method of payment, the accounts and financial institutions used, and if applicable, the name of the payor on the payment form by or for the transferee entity or trust; and
  6. information concerning the residential real property, such as the address of the relevant property, if applicable, and a legal description, such as the section, lot, and block.

The 2024 NPRM also sets forth guidelines for how to collect and maintain records for the information set forth above.  The person reporting would be able to collect the information directly from a transferee or a representative of the transferee, provided that the person certifies that the information is correct to the best of their knowledge.  The certification may be collected using a FinCEN form that may be provided by FinCEN such as under the Customer Due Diligence Rule, which requires certain covered US financial institutions to collect beneficial ownership information from legal entity customers, or the reporting person may incorporate a certification into a document of their own, including existing closing documents used by the reporting person.

Other Proposed Provisions

The Real Estate Report would need to be submitted no later than 30 calendar days after the date on which the transferee entity or transferee trust receives the ownership interest in the residential real property.

All records must be maintained for five years after the date of filing, and if applicable, the date of the signed designation agreement for inspection as authorized by law.

Reporting persons and Federal, State, local, or Tribal government authorities would be exempt from the confidentiality provision in 31 U.S.C. § 5318(g)(2) of the BSA prohibiting the disclosure to any person involved in the transaction that the transaction has been reported.  Even though U.S. financial institutions that file SARs generally are subject to legal restrictions prohibiting the disclosure of the existence of the SAR to any of its “subjects,” such a  rule “would not be feasible with the proposed Real Estate Report,” according to FinCEN.

Finally, persons involved in real estate closings and settlements are still exempt from the legal requirement to maintain an AML/CFT compliance program, unless they are a type of U.S. financial institutions already required to establish an AML/CFT program under FinCEN’s regulations.

Notably, the 2024 NPRM does not set forth any provisions or civil and criminal penalties for failing to file the Real Estate Report, submitting the Real Estate Report with inaccurate or incomplete information (or omitting material information), or not maintaining required records.

If you have any comments, questions, or concerns, please contact our AML Team and Corporate and Property Team.